Uber and Postmates filed a lawsuit in federal court in California on Monday, seeking an injunction to prevent the state’s landmark freelancer law from taking effect against them on Jan. 1 as scheduled.
The action underlines how high the stakes are for Uber and Postmates with the new California law, called Assembly Bill 5. The law could potentially threaten their businesses because under it, workers must be classified as employees rather than contractors under certain conditions, such as if a company controls how they do their work or if the work is a regular part of the company’s business.
Most employment experts have said the new law will require Uber and its rival, Lyft, along with delivery services like Postmates, to classify their drivers in California as employees. That could add 20 to 30 percent to Uber’s and Lyft’s labor costs and lead to many hundreds of millions of dollars in additional expenses a year, if not more.
As employees, drivers would be protected by minimum wage and overtime rules and would be eligible for workers’ compensation and unemployment insurance. The companies would have to pay half of their payroll taxes for Medicare and Social Security.
Postmates said it was seeking to delay the law from taking effect to gain time to figure out a compromise so that its workers would not be classified as full-time employees. Postmates and Uber argued in their complaint that California’s State Legislature had exempted certain industries while denying an exemption to what are known as “gig work” companies on essentially irrational grounds.
The suit would not stop the law from taking effect against workers outside the gig companies. A federal judge will decide whether to grant a preliminary injunction blocking the law from being enforced against the gig companies, which could later turn into a permanent injunction.
Uber said in a statement that it was bringing a legal challenge against the new law “on the basis of lack of equal protection and due process under both federal and state law.” The ride-hailing company declined to comment further.
Postmates said, “This lawsuit is an effort to preserve on-demand work opportunities,” added that it was urging state lawmakers, organized labor and Gov. Gavin Newsom to negotiate a compromise.
But Assemblywoman Lorena Gonzalez of San Diego, the bill’s author, said in a statement that “Uber is in court bizarrely trying to say A.B. 5 is unconstitutional.” She added, “The one clear thing we know about Uber is they will do anything to try to exempt themselves from state regulations that make us all safer and their driver employees self-sufficient.”
Uber and Lyft both said in documents they filed in anticipation of their public offerings in 2019 that having to classify drivers as employees could significantly hurt their financial performance. Both companies’ stocks have dropped since they went public this year.
California legislators passed the new law in September and it was signed into law. Uber, one of the main targets of the legislation, had previously declared that it did not plan to reclassify its drivers as employees and that it thought its drivers could retain their independent status even under the new law. Uber and Lyft have both also announced that they would each kick in $30 million for a state ballot initiative to essentially exempt their drivers from the new law.
In addition to Uber and Postmates, two workers — one who drives using Uber and another who delivers food through the Postmates app — also joined the lawsuit.